Why do most of us send our credit-card bills to South Dakota or Delaware? The answer to that seemingly arcane question illustrates the dangers of replacing state regulation with no regulation at all. It also offers a cautionary tale about a little-understood provision at the center of John McCain's health care plan. So bear with me for a little history.
Until the late 1970s, South Dakota and Delaware didn't have an outsized share of the credit-card business. Banks had to obey the interest caps of the states where borrowers lived. So, for example, loans to New York residents were always subject to New York's limits on interest rates. At 12 percent back then, and with high inflation, these laws sharply limited profits on credit cards.
Then in 1978, the Supreme Court said banks should follow the rate cap in their home states. This meant that as long as a credit-card company relocated to a state with a higher interest-rate limit, the company could lend to borrowers anywhere under that higher limit. Following the court's ruling, Citibank chairman Walter Wriston offered Gov. Bill Janklow a deal: If South Dakota lifted its rate cap altogether and formally invited Citibank to the state (as federal law required), the banking giant would move its credit-card operations to South Dakota—along with 400 good jobs.
The bill was introduced and passed in the space of a day. Soon after, Delaware lifted its cap, too. Voilà, South Dakota and Delaware became the hosts of most credit-card companies. And with the help of another 1996 Supreme Court decision, credit-card companies could charge what they wanted.
The centerpiece of McCain's plan, as reporting in the New York Times has noted, would eliminate the special tax treatment of employer-provided health care and instead offer tax credits to everybody who pays premiums. In a less-noticed move, McCain also proposes to change the market for health insurance that people buy on an individual basis—he says that "families should be able to purchase health insurance nationwide, across state lines." That would be a big change. Today, insurance companies need to follow the laws of the states where they sell individual insurance plans, just as credit-card companies did before 1978. If an insurer wants to sell policies in New York, the insurer has to obey New York's laws. Many states pretty much let companies sell the policies they wish, but others set a floor of protections. New York laws, for example, require that companies issue coverage to all new customers and not set higher rates for people who are already sick. As Stephanie Lewis points out in a forthcoming paper for the Center for American Progress, 17 other states impose at least some similar regulations. These rules may increase premiums for healthy folks, but they also give people with pre-existing conditions a decent chance to afford health insurance in the market for individually purchased policies.
McCain argues that different states' regulations "prevent the best companies, with the best plans and lowest prices, from making their product available to any American who wants it." Although he hasn't given details, his supporters say that he favors an approach, endorsed by President Bush and championed by McCain's Arizona colleague John Shadegg, that would allow insurers to choose the state laws under which they are regulated. (I e-mailed the campaign about the specifics of McCain's approach and didn't hear back.) An insurance company that chose to be regulated under Arizona law could sell policies in New York without following New York rules. Arizona, like most states, lets companies charge what they want to people who are sick—or simply deny them coverage altogether. Under Shadegg's bill, insurers wouldn't even need to pick up and move their operations; it would be enough to file some paperwork with a state insurance commissioner and pay that state's relevant taxes.
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